whiffer

its late & im tired. what better time to fix social security!

Economics 254
November 30, 1999
Social Security in the 21st Century

Social Security was created by the Social Security Act in 1935. It was originally enacted to combat the elderly poverty rate of the day. Today, however, it has become much more than a tool to prevent poverty among the elderly. It is now a part of life that many take for granted. This plan was enacted at a time when those who qualified comprised roughly 7% of the population compared to today where 12.8% qualify (Fortune 88). The baby-boomer generation is only going to bring the qualifying percentage even higher. Social Security was designed in a time long since gone and is due for dramatic reform if such a policy is to remain. Tax rates, contribution ceilings, and age requirements must be reevaluated for Social Security to continue into the future successfully.

While Social Security has been and continues to be amended, it has still fallen short of keeping up with the large population growth that has occurred since its inception. Population distributions are changing dramatically and are only getting further away from the level in which Social Security was created to aid. In 2000 those 65 years and up will represent 12.8% of the population while those 15 to 44 years will represent 43.3% (US Census Bureau). The estimated corresponding numbers for 2050 are 20.0% for 65 years and up and 37.8% for 15 to 44 years old (US Census), a rise of nearly 8% for those who qualify with a reduction in the mass work force of around 5.5% (See Table 1). Certainly contributions in the pay-as-you-go system will be short lived as there are more receivers than givers. The fairly recent move in 1983 (SSA No. 05-10055) to a partially funded program is only the beginning of what must be done to secure Social Security for future generations to come.

The average male worker retired at 69 years old in 1940 and had a life expectancy of 9 years (Bruce 319). Today the average man retires at 64 and averages 16 more years of life (Bruce 319). Women today also retire at around 64 but tend to live another 20 years (Bruce 319). Life expectancy has increased from 62.9 for both sexes in 1940 (those eligible in 2005) to 76.5 in 1997(eligible in 2062) for both sexes (US Census). The benefits scheduled for the next 60 years are going to be going to people who will live as much as 14 more years than previous recipients are. While the Social Security Act was amended recently to raise eligibility to 67 years old over several years (Bruce), this is only the precursor of what must be done. Not only has the monetary amount of Social Security risen but also those who receive it have grown exponentially. Also interesting to note is the estimated increase in centenarians up from about 70,000 in 2000 up to 800,000 in 2050! An estimated rise of about 0.028% to 0.21% of the nations population. In both instances these centenarians make up a negligible percent of the population (US Census). However, the rising survival rates show that people are living longer, much longer.

For the Social Security Fund to last well past 2030 and into the future things must change. One such change is the eligibility age. What is proposed is plan that delegates benefits to a portion of the population equal to the estimated life expectancy (as calculated by the US Census) minus a nominal percentage such that the eldest 30% or 10% or x% of the population receive benefits. x would ultimately represent a percentage of the population that roughly equaled the percentage of people that received Social Security when it was first enacted. This age level would be, at the very least, the new fixed level or be a floating value that is evaluated every x years. This new age would be implemented over several years at the rate of something like: (y2-y1)/10 where y2 is the new age, y1 is the old age and 10 represents the number of years over which to increase the age level. This, or any other, readjustment may cause horizontal inequity for those who are nearing retirement or Social Security eligibility (Bruce 321). While this seems extreme and implausible, as it very well may be, it is important to remember the foundation under which the plan was enacted. This reform is not meant to penalize the population for being old, but rather readjust for living longer. This is hardly the first time that some have been hurt to secure a longer future for themselves and those behind them. For example, when the government readjusted for the over-indexing of benefits in 1977, people reaching age 62 between 1979 and 1983 (the “notch” generation) believed that they were disadvantaged compared to those that had just before the plan turned of age (Bruce 321).

It is also important to note that while this plan proposes to raise the eligibility age of Social Security it has been found that there is a small correlation between the level of Social Security benefits and the likelihood of retirement at a given age (Samwick 208; Friedberg 213). From this it must be understood that reform aims at not increasing the age of retirement but rather increasing the life of the Social Security Fund. One hopes that earlier retirement leads to the retirement and bequest effects (Bruce 317). That is, one who is likely to retire early is likely to save more to make an early retirement possible (Bruce 317) for themselves and their children’s future.

Contribution ceiling is another area of Social Security that needs reform. The level set at inception was capped $3000. Today that level is capped at $68,400 (SSA No. 05-10094) rising steadily along the way. What is proposed is a removal of the ceiling. While this is a stab to the heart for “well to do” America, it is also policy that may allow another inverse effect, that is an inversely proportional Social Security tax rate. With the additional money that is levied from the removal of the ceiling, the tax rate can be lowered. Of course, if the tax rate is lowered to the level equal to the income at the no-ceiling level, no difference will be noticed in revenues. The tax rate would be equal to or greater than the level required to raise the same amount with the current ceiling plan. With the nominally lower tax rate and the increased potential provided by no ceiling, increased revenues could be expected. As far as participation goes, the poor should be more than willing to accept a lower tax rate and the rich will resent me for ever being born. Actually, there would have to be some incentive for the rich to agree to such a policy, such as a revision of the PIA and AIME scales on the high end. Currently, the PIA and AIME are largely in favor of lower wage earners (SSA No. 05-10055). Perhaps one could revise the current 90/40/15% policy to have a high-end redistribution for those that pay an excessive monthly amount. The amount to start this added PIA redistribution kink could be set equal to a level determined to be the top 25th, 15th or 10th percentile of average wage or some percentile that would allow for such policy to pass.

Another characteristics of eligibility that can be adjusted are increased penalties for cashing in early. Currently, one receives 80% of full benefits at 62 years old. Revisions may provide that one may receive 60-80% if cashing in before age x (level determined by life expectancy equation). Again benefits are weakly correlated to retirement and this may not keep the elderly from retiring early but it does save money. Those that retire independent of Social Security benefit are less likely to at the level of poverty. This would suggest that those who do require Social Security would be required to work to age x. Conversely, the rewards for holding out from cashing in could be increased to keep some from redeeming earlier. Currently one receives 5.5% more each year after 65 until 70 for a total of 27.5% more benefits. This could be readjusted around age x such that one receives a competitive rate per year for 5-10 years equal to or less than the value that the Social Security Fund as a whole benefits in having that money for one more year to invest. In this instance, like the current plan but more so, individuals may be enticed to hold out a while longer and in doing so allow the Social Security Fund to compound and grow for that much longer.

Means testing is not the answer for prolonging the life of the Social Security Fund. Means testing would make saving for one’s own retirement disadvantageous (Bruce 321). This would also hurt the number of 65 or x year olds still in the work force (Bruce 321). Social Security has done its job to lessen poverty among the elderly as seen in Figure 1 (SSA No. 05-10055). It has now done what it was originally set out to do. Now it is time for stabilization policy and growth such that the Social Security Fund may continue into the distant future for those qualified.

These reforms may change Social Security, as we know it. For the better or worse? That remains to be seen. This paper has attempted to solve a problem that neither the House or Senate has been able to perfect in 60 years. The outlined policy changes above would most likely get one’s political careers handed to them in a paper sack. However, one may believe that this is more due to bureaucracy than misguided policy (or maybe not). Many worthwhile policies have been shunned by those with power, deep pockets, or ulterior motives. I have tried only to hurt as few and help as many as possible. The suggested remedies allow for the stable level of elderly poverty, an increase in funding for the baby-boomer generation, and lower tax rates. I do not believe that those that founded the Social Security Act ever took into account that people would begin living longer and longer. Policy must focus around the life expectancy levels equivalent to when the policy was enacted and laterally shift those percentages over to today. Such a plan would certainly put social security on stable track with what it was originally meant to effect. Pareto optimal? Maybe not. Utilitarian? Maybe, accidentally. 65 is not what it used to be.

Bibliography

Bruce, Neil. Public Finance and the American Economy. Reading: Addison-Wesley, 1998: 298-323.

Friedberg, Leora. “The Effects of old age assistance on retirement.” J Public Finance 71 (1999): 213-232.

“The Future of Retirement” Fortune 140 No. 4 August 16, 1999: 88.

Samwick, Andrew A. “New evidence on Pensions, Social Security, and timing of retirement.” J Public Finance 70 (1998): 207-236.

United States. Center For Disease Control. National Vital Statistics Report. Washington: GPO, 1999.

United States. Social Security Administration. Will Social Security Be There For You?
Washington: GPO No. 05-10055, 1999.

United States. U.S. Bureau of the Census. Resident Population Projections of the United States: Middle, Low, and High Series 1996-2050. Washington: GPO, 1996.

United States. U.S. Bureau of the Census. Statistical Brief: Sixty-Five Plus in the United States. Washington: GPO, 1996.